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Regulators Planning Crackdown on Payday Loans

Feb. 10, 2015
Banking, Loans, Payday Loans
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Federal regulators may soon be cracking down on payday loans, the short-term, high-interest loans they say too often lure consumers looking for quick help into expensive, long-term debt traps.

The Consumer Financial Protection Bureau, created in the wake of the Wall Street financial crisis, is looking to establish nationwide rules to police lenders who have proven adept at skirting a patchwork of state laws.

“The CFPB is considering what rules may be appropriate for addressing the sustained use of short-term, high-cost credit products, including payday loans,” spokesman Sam Gilford said in an email. “The bureau’s research has found that what is supposed to be a short-term emergency loan can turn into a long-term and expensive debt trap.”

New rules would mark the first time the federal government has stepped in to regulate the controversial industry.

Title loans

The proposed regulations are also expected to deal with loans tied to car titles, as well as high-interest loans that stretch beyond the traditional two-week pay period, The New York Times reported, citing unnamed sources who have been briefed on the matter. The agency indicated it would impose regulations on the lenders last year.

Installment loans with interest rates above 36% likely will be addressed by the regulations, according to the newspaper. It is also expected to require lenders to assess the ability of borrowers to repay the debt.

The bureau says payday loans are a $46 billion industry. A study released in March 2014 says that four out of five of the loans, which are designed to be paid back quickly, are rolled over or renewed by consumers and that, in the majority of cases, consumers pay more in interest than they would have for the original loan. Annual rates can soar well above 300%.

Lenders object

Lenders, who are expected to lobby Washington lawmakers against tougher regulations, argue that payday loans offer help to consumers in difficult financial times who can’t obtain other types of credit.

Some members of Congress are also considering legislation to crack down on the industry.

Last month, U.S. Sen. Sherrod Brown, D-Ohio, issued a statement saying that high-interest loan companies “are thriving at the expense of low-income Americans.”

He proposes a plan that would let people who qualify for the federal earned-income tax credit — generally low- to moderate-income working families — borrow up to $500 interest-free against the amount that they’re owed from the credit.

“Family priorities like groceries, dentist appointments and utilities shouldn’t go unmet, and Ohioans shouldn’t be trapped with a lifetime of debt from predatory loans,” Brown said in the statement. “This program will help protect low-income workers, allowing them to better provide for themselves and their children.”

Limits recommended

The National Consumer Law Center, an advocacy group in Boston, calls for a limit on interest rates at 36%. The group also wants consumers to have at least 90 days to pay back loans — longer if it’s a large loan — and the ability to pay in equal installments instead of obtaining loans in which payments balloon the longer they go unpaid. They’d also like a ban on the practice of requiring that a postdated check be handed over to a payday lender, which typically is cashed on the consumer’s next payday.

A spokeswoman for NCLC declined to make a detailed statement for this story because the proposed federal regulations have not yet been made public.

The Consumer Financial Protection Bureau is expected to make the proposal public soon.

Image via iStock.